Gerald Connor / December 2nd, 2020

November: Record Gains and Relief From Worst Case Fears

November’s stock market gains will go down as some of the best on record. These were driven by earnings growth as well as three pieces of news that were a relief from worst case fears. First was the Biden win without giving control of the Senate to the Democrats, second was the Pfizer vaccine announcement and last was Biden’s telegraphed appointment of Janet Yellen as the next Secretary of the Treasury.

Here are some thoughts on the market, the election, the economy and the Federal Reserve.

Market: New names lead the gains

The S&P 500 gained 10.8% (7.74% Cdn) in November, while the Dow Jones did 1% better. That’s the strongest monthly gain since January 1987.

Interestingly, value stocks outperformed growth stocks by roughly 45% with energy, financials, industrials and materials doing better than the technology, internet companies and stay-at-home stocks that had been leading the market.

Smaller companies significantly outperformed bigger ones, and businesses like airlines, hotels, resorts and cruise lines surged on the prospect of a vaccine.

A critical issue is whether value-oriented stocks will maintain their leadership or whether leadership will revert back to a small group of technology companies. The test is likely to come after a small correction, when we see which group leads the next rally.

With 86% of companies trading above their 200-day moving average and bullish sentiment at 60%, short-term caution is warranted. Nevertheless, there is a lot of money still available to enter the market, as cash and other liquid assets have shot up $2.6 trillion to $16.3 trillion.

U.S. Election: Big changes off the table

The Biden win without a blue wave allowing the Democrats to take over the Senate is probably more about what won’t happen than what the new administration will propose. Off the table are higher taxes, massive federal spending, universal basic income, nationalized healthcare, a packed Supreme Court and a Green New Deal.

However, there is a runoff election this January for two Senate seats for Georgia. The Republicans lead in the polls, but it is worth anticipating what happens should the Democrats win those seats and the Senate becomes tied at 50 members each.

Kamala Harris as Vice President presides over the Senate and would then have a tie-breaking vote. In this scenario, Republicans would lose their committee chairmanships and their ability to serve as a check and balance to Biden’s plans.

If the Democrats get organized, what has come off the table would suddenly be back on again. However, the Democrats aren’t unified. For example, Joe Manchin, a Senator from West Virginia, is an avowed conservative who recently said, ”I want to rest those fears for you right now… whether it be packing the courts or ending the filibuster, I will not vote to do that.” He further stated that the “Green New Deal and all this socialism was not who we are as a Democratic Party.”

Nonetheless, as Yogi Berra once said, it ain’t over until it’s over.

Economy: Strong expansion but soft patch ahead

Third quarter GDP came in at +33.1% and the fourth quarter is expected to be around +11%. Nonetheless, the market is caught in a conflict. For the next six months, the Corona virus count could continue to climb, threatening the near-term expansion until a vaccine finally rids us of the pandemic and we can get back to normal.

Back in March, the passing of the CARES Act provided Americans with a one-time payment of $1,200 and an additional $600/mo through August. In all, the government provided $842 billion in new benefits while the earnings shortfall amounted to $444 billion, resulting in $398 billion in extra stimulus. It’s the first recession where personal income actually increased.

Not all of this income was spent right away. April savings hit $400 billion, well above the $103 billion baseline as stores were closed. This pushed the amount of cash on household balance sheets over $2.0 trillion. More recent spending on goods has benefited from pent-up demand, while spending on services remained restricted. For manufacturing, this spending arrived as inventories were depleted.

Today, savings are being drawn down and CARES ACT benefits will run out for about five million people at year end. With COVID cases spiking, we’ll have to wait and see if the economy can skate through this soft patch.

Nonetheless, a vaccine and better weather in the spring provide a lot of hope.

Federal Reserve: A familiar name with untested ideas

One of the recent announcements that encouraged the market was Biden’s telegraphed nomination of past Fed Chair, Janet Yellen, as Secretary of the Treasury.

First, it eliminated a more threatening option such as Elizabeth Warren, and was a more moderate choice than what many progressives in the party had hoped for. The selection immediately sent bank stocks 1.9% higher on the day and 4.6% higher for the week.

However, Yellen has a lot in common with the Biden agenda. She favours more government fiscal spending, shares concern over labour market inequality, and was considered one of the most dovish FOMC members. As chair of the Fed, she even suggested that congress should give the central bank the authority to buy equities.

Loose monetary policy is good for stocks and will give Biden a workaround for his policies if Congress won’t cooperate, as he can apply executive orders with financial support from the Fed.

Down the road, this is embarking on untested Modern Monetary Theory, where the government takes over from the banks in deciding what gets spent and who gets to spend it. It is further confirmation that the government will practice Financial Repression, a time-tested method of inflating away the excesses of too much debt by holding interest rates below the level of inflation and GDP growth.


The market has had a pretty significant rally but nothing that isn’t consistent with what we have seen coming out of other recessions. Yet, in the short term, it’s overvalued and could react to negative news coming from a Covid lockdown. The election is behind us, which has resolved a major uncertainty with an acceptable resolution, especially since it appears to assure further monetary policy support.

What is still uncertain is the potential for a surprise coming in January from the Georgia Senate runoff and the stock market leadership in this next phase of the market. But a rotation to value or economically-sensitive companies would be consistent with what we have seen before.

In the meantime, November’s performance has been a reassuring shift in market sentiment.